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Globalisation and Finance at the Crossroads pp 1–39Cite as

Palgrave Macmillan

Globalisation Sets the Background to the Crisis

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Abstract

The authors explain globalisation and provide an interesting history of its various stages—including reasons why emerging countries turned away from the advanced nations as a model for economic development. Turning to recent decades, they counterpose two very different parts of the world economy that have begun to butt-up against each other. Topics such as the China saving glut, exchange rate management and foreign buying of US securities, subsidies to state-owned enterprises (SOEs), rising Chinese import penetration following WTO entry and the creative destruction technological responses of large companies are brought together as key preconditions for the 2008 crisis. With new empirical evidence, they link these developments to the hollowing out of jobs, low inflation, the price of US treasuries, mortgages rates and asset price inflation.

The original version of this chapter was revised: Misspelt author name has been corrected. The erratum to this chapter is available at https://doi.org/10.1007/978-3-319-72676-2_10

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Notes

  1. 1.

    See Blundell-Wignall et al. (2013) for a more detailed study of some of these points.

  2. 2.

    See Bakker (1996) and Wyplosz (2001). McKinnon (1973) amongst other uses the term ‘financial repression’, for systems, often with interest rate controls, that keep saving yields below inflation enabling governments to incur more debt for development paid for in part by an inflation ‘tax’.

  3. 3.

    See OECD (2002), for a full description of measures and dates.

  4. 4.

    See OECD (2015).

  5. 5.

    See C. Johnson (1982).

  6. 6.

    Each major company formed a long-term relationship with a ‘main bank’.

  7. 7.

    See Fukao (1990).

  8. 8.

    ‘Intervention’ refers to the practice of choosing a target level for the exchange rate by the central bank which stands read to buy or sell the currency at that price. To hold the exchange rate down in the face of buying pressure usually results in the accumulation of foreign currency reserves at the central banks, and the sale of the local currency, which finds its way into the domestic banking system and expands the money supply.

  9. 9.

    See Williamson (2004). The emerging economy import substitution model had failed.

  10. 10.

    Much of the discussion originated with a focus on the experience of the ‘Southern Cone’ of Latin America and took place in the context of the contrasting success of the Asian Tigers. A synthesis of these ideas gradually came to be known as the ‘Washington Consensus’.

  11. 11.

    The role of the state varied in intensity across these countries.

  12. 12.

    Many have used the Asia crisis as an excuse justifying capital controls. See, for example, J. Stiglitz and S. Yusuf (2001), and articles therein. The real problem, however, is managing the exchange rate, and monetary policy accommodating speculation as a result of exchange market intervention. Australia is in Asia and has followed policies of free capital flows and floating exchange rates since 1983. It suffered no financial crisis in 1997 or subsequently. Others have rightly argued for the need to restructure the global financial architecture. See B. Eichengreen (1999). But how to do this remains elusive.

  13. 13.

    See Corsetti et al. (1998).

  14. 14.

    See S. Radelet and J. Sachs (1998).

  15. 15.

    See Allison (2015). He points out that China’s military leaders interpret this as ‘wait before getting even’.

  16. 16.

    See Feldstein and Horioka (1980).

  17. 17.

    See Chapter 9 for a discussion of these issues.

  18. 18.

    Capital account management can be by residence—domestic versus foreign. But it can also be by currency, including restrictions on the forward foreign exchange markets, as imposed by Korea in 2010.

  19. 19.

    For example United States Department of the Treasury (2016).

  20. 20.

    As in the Harrod-Balassa-Samuelson effect. In a survey of the empirical literature to 2006, Tica et al. (2006) found that 49 out of 58 empirical studies supported the presence of the effect. More recently Berka et al. (2014) found evidence for the effect in the context of European data. Rodrik (2008) uses this approach.

  21. 21.

    See Liu (2005) and Cai et al. (2008).

  22. 22.

    See Ma and Wang (2010).

  23. 23.

    See Ma et al. (2016).

  24. 24.

    See Bernanke (2005).

  25. 25.

    Even companies lower down in the value-added chain, such as the Maquiladoras on the Mexican border, are having to restructure due to China/Asia pressure.

  26. 26.

    See, for example, Helpman et al. (2004) and Melitz and Redding (2012). The underlying idea is that only highly productive firms are able to make sufficient profits to cover the large fixed costs required for export operations.

  27. 27.

    Unmanned factories are already operational in North America. Amazon is about to launch unmanned stores, so that even lower-skilled service sector jobs are at risk. Any activities that can be broken up into calculations and/or repetitive activities can be digitalised and linked up across the internet and applied to everything in the end: production, innovation and design, inventory control and logistics, and driverless road, rail, sea and air transport. Robotics, cloud computing and the internet of things (where objects can communicate information about themselves to feed into the above processes) are platforms for innovation that are unstoppable in businesses that want to survive in the modern competitive world.

  28. 28.

    See OECD (2017).

  29. 29.

    The Heckscher-Ohlin and Stolper-Samuelson theorems are well known in undergraduate courses.

  30. 30.

    See, for example, Box 1 of OECD, ILO, World Bank and WTO (2010).

  31. 31.

    The Harrod-Balassa-Samuelson effect: wages will also tend to rise in the non-traded sector in order to retain workers, and this is passed on in higher non-traded prices. As this occurs over long periods of time, the general price level will rise versus the price of goods overseas.

  32. 32.

    This updates Fig. 11 from Acemoglu and Autor (2011) for the USA, which is also based on the Goos et al. (2009) study for Europe. An additional 10 years of data are included.

  33. 33.

    While these patterns imply employment income distribution would worsen, it need not worsen after tax and transfer payments. This study is concerned with the pressures from globalisation and not the redistributive policies that they might improve income distribution.

  34. 34.

    Such as: Brexit, the election of the US President, the rise of right wing politics in Europe, and referendum outcomes in Switzerland.

  35. 35.

    Recall that these companies use employees from countries in multiple national and international locations.

  36. 36.

    See also Divided We Stand (OECD 2011) which shows that the top decile wages grew faster than the bottom decile in all OECD countries from the mid-1980s to the late 2000s.

  37. 37.

    This variable is correlated with excess saving reflected in the current account surplus: since current accounts have to be financed, and official lending through reserves accumulation was the principle channel for this.

  38. 38.

    See Blundell-Wignall and Roulet (2014), and references therein.

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Author information

Authors and Affiliations

  1. University of Sydney and OECD (consultant advisor to the Secretary General, and former Director of the Financial and Enterprise Affairs Directorate), Paris, France

    Adrian Blundell-Wignall

  2. NHA Economics, Ltd., Paris, France

    Paul Atkinson

  3. Organisation for Economic Co-operation and Development, Paris, France

    Caroline Roulet

Authors
  1. Adrian Blundell-Wignall
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  2. Paul Atkinson
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  3. Caroline Roulet
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Appendix to Chapter 1: Modelling the Effect of Foreign Buying on US Bond Yields

Appendix to Chapter 1: Modelling the Effect of Foreign Buying on US Bond Yields

Table 1.1 shows the Engle-Granger co-integration and error-correction model estimates for the 10-year US Treasury bond rate, where CPI is the consumer price index, LIBOR is the US 3-month rate and Treasury securities holdings by foreigners and by the US Federal Reserve are expressed as a per cent of GDP.Footnote 38

Table 1.1 US 10-year bond model
Full size table

According to this model, the contributions to the overall fall in the US bond yield are:

  • The move up in foreign and Federal Reserve holdings of US Treasuries as a percentage of GDP. This was 15.4% in January 2002 (worth 125 basis points off the yield) and rose to 21.2% (165 basis points off the 10-year rate), by January 2007. This variable peaked most recently at over 40% (worth a full 3 percentage points off the yield).

  • Libor just prior to the crisis was just over 5% and fell to around 0.3%. This would account for a 1.1 percentage point fall in the 10-year bond rate.

  • The fall in inflation, from around 4% to just less than 2% over this period, on average, subtracted around 50 basis points from bond yields over the period.

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Blundell-Wignall, A., Atkinson, P., Roulet, C. (2018). Globalisation Sets the Background to the Crisis. In: Globalisation and Finance at the Crossroads. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-72676-2_1

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